U.S. Treasuries’ Worst Quarter Since 1980 Upended Global Markets
(Bloomberg) -- The promised end of the pandemic draws closer with every shot in the arm. So in the first three months of 2021, traders raced to position themselves for a post-Covid world by girding for super-charged growth and higher inflation.
This reflation trade put Treasuries on course for their worst quarter since 1980, with the global bond plunge sending yields surging to pre-pandemic levels. These sharp moves spooked investors, who were already turning away from pandemic favorites, like tech companies, into value stocks poised to benefit from economic reopening. Market fever dreams played out in cryptocurrencies and newfangled ways to take companies public. And even as the U.S. dollar proved its resilience, traditional haven currencies were battered.
At the same time, recovery measures of new U.S. President Joe Biden helped to flood money markets and, if he has his way, this will soon be followed by trillions of dollars in additional infrastructure spending. All the while, the Federal Reserve shows little inclination to rein in long-end yields.
“Generally reflation has been the dominant driver of global price action,” said Simon Harvey, senior market analyst at Monex Europe, who revised his dollar outlook this week. “What wrong-footed most people coming into 2021 is just how aggressive the U.S. outperformance was going to be.”
Here are some of this quarter’s most notable moves:
With the size of U.S. stimulus putting the nation on course for a swift economic rebound from the pandemic, it’s no surprise that U.S. Treasuries led the global rates selloff. They’re on track to record their worst quarter since 1980, according to Bloomberg Barclays indexes. By comparison, the retreat seen in Europe and Asia was in line with quarterly declines seen in 2019 and 2020, respectively.
Treasuries extended losses this week, fueled by Biden’s plans to accelerate the vaccine campaign and rebuild infrastructure. The divergence between U.S. and European markets was borne out in the spread between benchmark Treasuries and bunds, which widened more than 50 basis points. That about matched the move seen in the final quarter of 2016, and a bigger jump hasn’t been seen since 1993.
The climb in U.S. yields relative to major peers helped to drive a surge in the dollar that ran counter to many expectations for 2021 as the currency turned from a prime haven at the height of market turmoil in March 2020 into a bet on U.S. economic supremacy.
Traditional havens of the currency world -- the Japanese yen and Swiss franc -- bore the brunt of the selling, with each suffering their worst quarter in years.
The importance of pandemic recovery was evident across currency markets. In a change from last year’s Brexit wrangling, the outlook for the British pound was all about the U.K.’s vaccine drive, which far outpaced the European Union’s effort, setting the euro up for its worst quarter since 2015.
Brazil’s currency, which fell more than 7%, was among the poorest performers over the period as the country struggled to contain its mounting Covid crisis. Turkey was one of the few emerging markets whose currency did even worse. While much of that is the result of a shock decision to fire the central bank chief, that move came after the monetary authority raised its benchmark in response to global rate and foreign-exchange pressures.
Billions are on the move as investors rotate away from previously high-flying areas and toward pockets of the market that stand to benefit from a brightening economic outlook. In that environment, tech stocks -- 2020’s undisputed winners -- have lagged, while smaller companies have outperformed. The Russell 2000 index of smaller firms outperformed the tech-heavy Nasdaq 100 for the second-straight quarter, beating it by about 10 percentage points. Value stocks, too, stepped into the limelight, with the Russell 1000 value index beating its growth counterpart by roughly the same amount.
“We would expect that rotation to continue,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “Moving forward, it’s going to be more about the recovery plays, and that’s not a story that’s going away.”
But the rise in rates rattled more speculative corners of the market as investors started to question lofty valuations. Sentiment soured, for instance, on special purpose acquisition companies, a group that came to symbolize risky behavior in equities. An index tracking SPACs is down roughly 21% since its mid-February peak. Meme-stock mania also cooled: An index tracking companies including GameStop Corp. and Naked Brand Group Ltd. is down about 28% since its recent January high, data compiled by Bloomberg show.
“You’re seeing corrective phases in those previously hot areas, but it’s happening through a process of rotation, so the money is just going to other parts of the market,” Liz Ann Sonders, chief investment strategist at Charles Schwab, said by phone. “There was so much hype and so much appreciation that, yes, I think it’s natural and healthy to see rollovers in those areas.”
But while benchmark stock indexes glide along, the subsurface churn has been extremely violent. A model from Bank of America that plots how much value is being created and destroyed each day in individual stocks shows that 2021 has generated more turbulence than virtually any other year. The volatility -- which is prevalent among small-cap stocks as well -- is just being masked because up-and-down moves in different companies over days and weeks have tended to offset each other.
Meanwhile, turbulence in the $21 trillion Treasury market has been on the rise. The ICE BofA MOVE Index, a gauge of U.S. bond volatility, has been grinding higher. The measure currently clocks in at 67, higher than its one-year average of 52 and well above September’s low of 37.
Raw materials from copper to oil have started the year off strong, with investors flocking to commodities as a popular pandemic recovery trade and to hedge against inflation.
The 23-member Bloomberg Commodity Spot Index in February reached the highest in almost eight years before easing this month, and still remains on track to notch a gain this quarter. JPMorgan Chase & Co. even went as far as to flag the start of a new commodities supercycle. An upcoming energy transition could constrain oil supplies, while at the same time boosting demand for metals required in renewables infrastructure, JPMorgan analysts said in a report last month.
Investors in credit benefited from a narrowing in spreads to pre-pandemic levels, but that did little to offset the negative impact from the broader rise in rates -- the Bloomberg Barclays U.S. Corporate Bond Index’s 5% drop has it on course for its worst quarterly return since 2008.
Emerging-market bond spreads drifted wider, but the shift wasn’t enough to throw bond sales off track. The gap between emerging-market hard currency debt and Treasuries rose seven basis points in the quarter, according to a JPMorgan Chase & Co. index, compared with a 335-basis point jump the same period last year.
That said, cracks have recently started to show on issuance front. Indonesia shrank the size of a debt offering, Russia canceled a bond sale and South African debt saw lower demand than usual.
Cryptocurrencies have had a marvelous 2021 so far. Bitcoin, the world’s largest digital asset, has doubled since the start of the year, gaining 104% in its second-best quarterly performance since June 2019. Much of its momentum has been driven by wider institutional acceptance, with more mainstream firms taking a greater interest in crypto assets. At the same time, applications for Bitcoin exchange-traded funds also trickled in, with Fidelity Investments the latest firm to join the list of crypto-ETF hopefuls.
Meanwhile, fans, including Tesla Inc.’s Elon Musk, have argued the coin can be a great store of value -- Bitcoin gained after the electric-vehicle maker said that it put more than $1 billion into the coin.
Still, others worry it’s run up too far, too fast and could be losing its shine as speculation grows that retail investors are becoming less involved in the market. Bitcoin hit a record of $61,742 in mid-March and is roughly 4% off its highs.
©2021 Bloomberg L.P.